Block 4: The Five Generic Competitive

Strategies
LEARNING OBJECTIVES
1. What distinguishes each of the five generic strategies and why some of
these strategies work better in certain kinds of competitive conditions than in
others.
Generic Competitive Strategies
A company's competitive strategy deals exclusively with the specifics of
management's same plan for competing successfully its specific efforts to position
itself in the marketplace, please customers, ward off competitive threats. and
achieve a particular kind of competitive advantage.
1) Biggest factors that distinguish one competitive strategy from another boil down
to: Whether a company's market target is broad or narrow and
2) Whether the company is pursuing a competitive advantage linked to lower costs
or differentiation.

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5 Generic competitive strategies:
1. Low-cost provider: Striving to achieve lower overall costs than rivals on
products that attract a broad spectrum of buyers.
2. Broad differentiation: Differentiating the firm’s product offering from rivals
with attributes that appeal to a broad spectrum of buyers.
3. Focused low-cost: Concentrating on a narrow price-sensitive buyer
segment and on costs to offer a lower priced product.
4. Focused differentiation: Concentrating on a narrow buyer segment by
meeting specific tastes and requirements of niche members.
5. Best-cost provider: Giving customers more value for money by offering
upscale product attributes at a lower cost than rivals.
2. The major avenues for achieving a competitive advantage based on lower
costs.
Low-Cost Provider Strategy
Low-cost leaders: Successful low-cost leaders, who have the lowest industry costs,
are exceptionally good at finding ways to drive costs out of their businesses and still
provide a product or service that buyers find acceptable.
Cost-Efficient Management of Value Chain Activities
For a company to do a more cost-efficient job of managing its value chain than rivals,
managers must diligently search out cost-saving opportunities in every part of the
value chain. No activity can escape cost-saving scrutiny, and all company.
Competitive advantages and risks
 Greater total profits and increased market share gained from under-pricing
competitors.
 Larger profit margins when selling products at prices comparable to and
competitive with rivals.
 Low pricing does not attract enough new buyers.
 Rival’s retaliatory price-cutting sets off a price war.
A low-cost advantage over rivals can translate into better profitability than rivals
attain.
Major avenues for achieving a cost advantage:

♦ Low-cost advantage
 Cumulative costs across the overall value chain must be lower than
competitors’ cumulative costs.

♦ How to gain a low-cost advantage

 Perform value-chain activities more cost-effectively than rivals.

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 Revamp the firm’s overall value chain to eliminate or bypass cost-producing
activities.
Cost-efficient management of value chain activities:
 Cost driver
o A factor with a strong influence on a firm’s costs.
o Can be asset-based or activity-based.
 Securing a cost advantage.
o Use lower-cost inputs and hold minimal assets.
o Offer only “essential” product features or services.
o Offer only limited product lines.
o Use low-cost distribution channels.
o Use the most economical delivery methods.

Cost-cutting methods:
1. Capturing all available economies of scale: Economies of scale stem from an
ability to lower unit costs by increasing the scale of operation.
2. Taking full advantage of experience and learning-curve effects: The cost of
performing an activity can decline over time as the learning and experience of
company personnel build. Learning and experience economies can stem from
debugging and mastering newly introduced technologies, using the experiences
and suggestions of workers to install more efficient plant layouts and assembly
procedures, and the added speed and effectiveness that accrues from repeated
operations.
3. Operating facilities at full or near-full capacity: Higher rates of capacity
utilisation allow depreciation and other fixed costs to be spread over a larger unit
volume, thereby lowering fixed costs per unit.
4. Improving supply chain efficiency: Partnering with suppliers to streamline the
ordering and purchasing process, to reduce inventory carrying costs via just-in-
time inventory practices, to economise on shipping and materials handling, and to
search for other cost-saving opportunities is a great approach to cost reduction.
5. Substituting lower-cost inputs wherever there is little or no sacrifice in
product quality or performance: If the costs of certain raw materials and parts
are too high, a company can switch to lower-cost items or maybe even design the
high-cost component out of the product altogether.
6. Using the firm’s bargaining power vis-à-vis suppliers or others in the value
chain system to gain concessions: Companies can draw up agreements with
suppliers to receive discounts on large-volume purchases.
7. Using online systems and sophisticated software to achieve operating
efficiencies: Sharing data and production schedules with suppliers, coupled with
the use of enterprise resource planning (ERP), and manufacturing execution
system (MES) software, can reduce parts inventories, trim production times, and
lower labour requirements.
8. Improving process design and employing advanced production
technology: Production costs can be cut by (1) using design for manufacture

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 (DFM) procedures and computer-assisted design (CAD) techniques that enable
more integrated and efficient production methods; (2) investing in highly
automated robotic production technology; and (3) shifting to a mass-
customisation production process.
9. Being alert to the cost advantages of outsourcing or vertical integration:
Outsourcing the performance of certain value chain activities can be more
economical than performing them in-house if outside specialists can perform the
activities at lower costs.
10. Motivating employees through incentives and company culture: Incentive
systems can encourage worker productivity and cost-saving innovations that
come from worker suggestions.
Revamping the value chain system to lower costs.
 Selling direct to consumers and bypassing the activities and costs of distributors
and dealers by using a direct sales force and a company website.
 Streamlining operations to eliminate low value- added or unnecessary work steps
and activities.
 Reduce materials handling and shipping costs by having suppliers locate their
plants or warehouses close to the firm’s own facilities.
The keys to being a successful low-cost provider.
Success in achieving a low-cost edge over rivals comes from out-managing rivals in
finding ways to perform value chain activities faster, more accurately, and more cost-
effectively by:
 Spending aggressively on resources and capabilities that promise to drive costs
out of the business.
 Carefully estimating the cost savings of new technologies before investing in
them.
 Constantly reviewing cost-saving resources to ensure they remain competitively
superior.
When a lot-cost provider strategy works best:
 Price competition among rival sellers is vigorous: Low-cost providers are in
the best position to compete offensively based on price, to gain market share at
the expense of rivals, to win the business of price-sensitive buyers, to remain
profitable despite strong price competition, and to survive price wars.
 There are few ways to differentiate industry products: When the differences
between product attributes or brands do not matter much to buyers, buyers are
nearly always sensitive to price differences, and industry-leading companies tend
to be those with the lowest-priced brands.
 Identical products are available from many sellers: Look-alike products
and/or overabundant product supply set the stage for lively price competition: in
such markets, it is the less efficient, higher-cost companies whose profits get
squeezed the most.

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 Most buyers use the product in the same ways: With common user
requirements, a standardized product can satisfy the needs of buyers, in which
case low price, not features or quality. becomes the dominant factor in causing
buyers to choose one seller's product over another's.
 Buyers incur low costs in switching among sellers: Low switching costs give
buyers the flexibility to shift purchases to lower-priced sellers having equally good
products or to attractively priced substitute products.
Pitfalls to avoid in pursuing a low-cost provider strategy.
 Engaging in overly aggressive price cutting that does not result in unit
sales gains large enough to recoup forgone profits.
 Relying on a cost advantage that is not sustainable because rival firms can
easily copy or overcome it: If rivals find it relatively easy or inexpensive to
imitate the leader's low-cost methods, then the leader's advantage will be too
short-lived to yield a valuable edge in the marketplace.
 Becoming too fixated on cost reduction such that the firm’s offering is too
features-poor to gain the interest of buyers: Low costs cannot be pursued so
zealously that a firm's offering ends up being too feature-poor to generate buyer
appeal.
 Having a rival discover a new lower-cost value chain approach or develop a
cost-saving technological breakthrough.
3. The major avenues to a competitive advantage based on differentiating a
company’s product or service offering from the offerings of rivals.
Strategic management principle: A low-cost provider’s product offering must
always contain enough attributes to be attractive to prospective buyers. Low price,
by itself, is not always appealing to buyers. Differentiation strategies are attractive
when buyers’ needs and preferences are too diverse to fully satisfy by a
standardized product offering. Successful product differentiation requires careful
study to determine what attributes buyers will find appealing, valuable, and
worth paying for.
Broad differentiation strategies:
 Effective Differentiation Approaches:
o Carefully study buyer needs and behaviours, values, and willingness to
pay for a unique product or service.
o Incorporate features that both appeal to buyers and create a sustainably
distinctive product offering.
o Use higher prices to recoup differentiation costs.
 Advantages of Differentiation:
o Command premium prices for the firm’s products.
o Increased unit sales due to attractive differentiation.
o Brand loyalty that bonds buyers to the differentiating features of the firm’s
products.

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The essence of a broad differentiation strategy is to offer unique product attributes
that a wide range of buyers find appealing and worth paying for. A uniqueness
driver is a factor that can have a strong differentiating effect.
Cost-efficient management of value chain activities:
A uniqueness driver can:
 A value driver is a factor that can have a strong differentiating effect.
(definition)
 Be based on physical as well as functional attributes of a firm’s products.
 Be the result of superior performance capabilities of the firm’s human capital.
 Influence more than one of the firm’s value chain activities.
 Create a perception of value (brand loyalty) in buyers where there is little
reason for it to exist.
Value drivers: The key to creating a differentiation advantage.

Ways that managers can enhance differentiation based on value drivers

include the following:
1. Create product features and performance attributes that appeal to a wide
range of buyers: The physical and functional features of a product have a big
influence on differentiation, including features such as added user safety or
enhanced environmental protection.
2. Improve customer service or add extra services: better customer services, in
areas such as delivery, returns, and repair, can be as important in creating
differentiation as superior product feature.

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3. Invest in production-related research and development (R&D) activities:
Engaging in production R&D may permit custom-order manufacture at an efficient
cost, provide wider product variety and selection through product "versioning." or
improve product quality.
4. Strive for innovation and technological advances: Successful innovation is
the route to more frequent first-on-the-market victories and is a powerful
differentiator.
5. Pursue continuous quality improvement: Quality control processes reduce
product defects, prevent premature product failure, extend product life, make it
economical to offer longer warranty coverage, improve economy of use, result in
more end-user convenience, or enhance product appearance.
6. Increase marketing and brand-building activities: Marketing and advertising
can have a tremendous effect on the value perceived by buyers and therefore
their willingness to pay more for the company's offerings. They can create
differentiation even when little tangible differentiation exists otherwise.
7. Seek out high-quality inputs: Input quality can ultimately spill over to affect the
performance or quality of the company's product.
8. Emphasise human resource management activities that improve the skills,
expertise, and knowledge of company personnel: A company with high-
caliber intellectual capital often has the capacity to generate the kinds of ideas
that drive product innovation, technological advances. better product design and
product performance, improved production techniques, and higher product
quality.
Revamping the value chain system to increase differentiation.

 Coordinating with channel allies to enhance customer value: Methods that

companies use to influence the value chain activities of their channel allies
include setting standards for downstream partners to follow, providing them with
templates to standardise the selling environment or practices, training channel
personnel, or co-sponsoring promotions and advertising campaigns. Coordinating
with retailers is important for enhancing the buyer experience and building a
company’s image. Coordinating with distributors or shippers can mean quicker
delivery to customers, more accurate order filling, and/ or lower shipping costs.
 Coordinating with suppliers to better address customer needs: Coordinating
and collaborating with suppliers can improve many dimensions affecting product
features and quality. Close coordination with suppliers can also enhance
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 differentiation by speeding up new product development cycles or speeding
delivery to end customers. Strong relationships with suppliers can also mean that
the company’s supply requirements are prioritised when industry supply is
insufficient to meet overall demand.
Delivering superior value via a broad differentiation strategy:
Broad Differentiation: Offering Customers Something That Rivals Cannot.
1. Incorporate product attributes and user features that lower the buyer’s
overall costs of using the firm’s product: Reducing raw material waste
through cut-to-size components, reducing inventory requirements through just-in-
time delivery, using online systems to reduce a buyer’s procurement and order
processing costs, and providing free technical support.
2. Incorporate tangible features (e.g., styling) that increase customer
satisfaction with the product: Including attributes that add functionality,
enhance the design, save time for the user, are more reliable, or make the
product cleaner, safer, quitter, simpler to use, more portable, more convenient, or
longer lasting than rivals’ brands.
3. Incorporate intangible features (e.g., buyer image) that enhance buyer
satisfaction in noneconomic ways.
4. Signal the value of the firm’s product offering to buyers (e.g., price,
packaging, placement, advertising): Include high price (which implies high
quality and performance), more appealing or fancier packaging than competing
products, ad content that emphasises a product’s standout attributes, the quality
of brochures and sales presentations, and the luxuriousness and ambience of a
sellers’ facilities.
Differentiation: Signalling Value. Signalling value is important when:
1. The nature of differentiation is based on intangible features and is therefore
subjective or hard to quantify by the buyer.
2. Buyers are making a first-time purchase and are unsure what their experience
will be with the product.
3. Product or service repurchase by buyers is infrequent.
4. Buyers are unsophisticated.
Strategic Management Principles
 Differentiation can be based on tangible or intangible attributes.
 Easy-to-copy differentiating features cannot produce a sustainable competitive
advantage.
 Any differentiating feature that works well is a magnet for imitators.
 Over differentiating and overcharging are fatal strategy mistakes.
Differentiation yields a longer-lasting/ sustainable and more profitable competitive
edge when it is based on a well-established brand image, patent-protected product
innovation, complex technical superiority, a reputation for superior product quality
and reliability, relationship-based customer service, and unique competitive
capabilities.

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Successful approaches to sustainable differentiation
 Differentiation that is difficult for rivals to duplicate or imitate:
o Company reputation.
o Long-standing relationships with buyers (brand loyal).
o A unique product or service image.
 Differentiation that creates substantial switching costs that lock in buyers:
o Patent-protected product innovation.
o Relationship-based customer service.

When a differentiation strategy works best:

o Buyers’ needs and uses of the product are diverse: Diverse buyer
preferences allow industry rivals to set themselves apart with product attributes
that appeal to buyers.
o There are many ways to differentiate the product or service that have value
to buyers: Industries in which competitors have opportunities to add features to
products and services are well suited to differentiation strategies.
o Few rival firms are following a similar differentiation approach: The best
differentiation approaches involve trying to appeal to buyers based on attributes
that rivals are not emphasizing.
o Rapid product innovation and frequent introductions of next-version
products heighten buyer interest and provide space for companies to pursue
distinct differentiating paths.

Pitfalls to avoid in pursuing a differentiation strategy:

 Relying on product attributes easily copied by rivals.
 Introducing product attributes that do not evoke an enthusiastic buyer response.
 Eroding profitability by overspending on efforts to differentiate the firm’s product
offering.

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 Offering only trivial improvements in quality, service, or performance features
visa-vis the products of rivals.
 Over-differentiating the product quality, features, or service levels exceeds the
needs of most buyers.
 Charging too high a price premium.
Focused (or market niche) strategies:

Focused low-cost strategy: Concentrates on the needs and requirements of a

narrow buyer segment/ market niche and strives to meet these needs at lower costs
than rivals thereby being able to serve niche members at a lower price.
Focused differentiation strategy: Concentrates on a narrow buyer segment/
market segment and outcompeting rivals by offering niche members customised
attributes that meet their tastes and requirements better than rivals’ products.
When a focused low-cost or focused-differentiation strategy is attractive:
 The target market niche is big enough to be profitable and offers good growth
potential.
 Industry leaders chose not to compete in the niche; focusers avoid competing
against strong competitors.
 It is costly or difficult for multi-segment competitors to meet the specialized needs
of niche buyers.
 The industry has many different niches and segments.
 Rivals have little or no entry interest in the target segment.
The risks of a focused low-cost or focused differentiation strategy:
 Competitors will find ways to match the focused firm’s capabilities in serving the
target niche.
 As attractiveness of the segment increases, it draws in more competitors,
intensifying rivalry, and splintering segment profits.
 The specialised preferences and needs of niche members shift over time toward
the product attributes desired by most buyers.

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4. The attributes of a best-cost provider strategy—a hybrid of low-cost
provider and differentiation strategies.
Best-Cost Provider Strategies

Core Concept: Best-cost provider strategies are a hybrid of low-cost provider

and differentiation strategies that aim at providing more desirable attributes (quality,
features, performance, service) while beating rivals on price.
A best-cost provider needs to position itself near the middle of the market with either
a medium-quality product at a below-average price or a high-quality product at an
average or slightly higher price. The target market for a best-cost provider is value-
conscious buyers-buyers who are looking for appealing extras and functionality at a
comparatively low price.
When a best-cost provider strategy works best
 Product differentiation is the market norm.
 There are many value-conscious buyers who prefer mid-range products.
 There is competitive space near the middle of the market for a competitor with
either a medium-quality product at a below-average price or a high-quality
product at an average or slightly higher price.
 Economic conditions have caused more buyers to become value conscious.
The risks of a best-cost provider strategy:
 Getting squeezed between the strategies of firms using low-cost and high-end
differentiation strategies.
A company’s competitive strategy should be well-matched to its internal situation and
predicated on leveraging its collection of competitively valuable resources and
capabilities.

The End.
Summaries from class slides, and textbook “Strategy Management, Custom Edition
for University of Pretoria (2020 Edition) Arthur Thompson, 2020e.”

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Distinguishing Features of the Five Generic Competitive Strategies (Summary)

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Copyrighted by Henia Potgieter © 2023-2033